IR35 is coming

On Thursday 6th of April 2017, new UK Government IR35 legislation finally kicks in for Public Sector LTD company contractors or as HMRC like to call it “Personal Service Company (PSC)” contractors.

It has already caused a shift in the amount of LTD company contractors currently willing to continue working their contracts in the public sector and will continue to cause waves as we progress through the deadline. From April 6th, IR35 status for contractors working in the UK Public sector will now be decided by the client (public sector body) and not the contractor.

The key terms here are whether the contract offered (role) by the client is “Inside” or “Outside” IR35. If the client decides that the contract is Inside IR35 or “in-scope” then the contractor will be taxed at source and will no longer be paid in gross. Note that the contractor will not receive the rights or benefits that a permanent employee would get but will be required to be taxed the same as a permanent employee. If the client deems the contract as Outside IR35 or “out of scope” then the contractor can continue to be paid in gross and will be responsible for their own taxes as a LTD company. However, both the client and contractor will need to make arrangements to prove their status as being outside IR35.

HMRC have released an online tool called “The Employment Status Service (ESS)” which is designed to test whether the relationship between worker and client is inside or outside IR35. The public sector bodies have had the responsibility to use the tool to assess their contractors IR35 status.

Based on this new legislation, there is not much flexibility for contractors. Their options will be to use an Umbrella company who will deduct tax and a fee for their service before payment to the contractor. The second option is to go PAYE directly with the client or through an agency like ourselves who will also deduct tax before releasing funds.

This sudden change of legislation has and will result in sudden decisions being made by public sector contractors. Some veteran contractors working through their LTD companies for several years have decided to pack up and go back to the private sector where they can enjoy their usual benefits as a contractor. However some have no choice but to absorb the change for now and have their taxes calculated and deducted for them on usually a weekly basis.

The reason for implementing the IR35 legislation is obvious, the UK Government HMRC want to clamp down on taxes being paid properly, this will result in more money for the taxman therefore more revenue for the government to spend elsewhere. In terms of the workforce, a wave of contractors are close to making their decisions to most probably move to the private sector, especially IT contractors. This is a highly complex transformation within the public sector and some bodies like the NHS have decided not to go through the intense assessment and have deemed all their PSC or LTD company workers as Inside IR35.

We will most definitely learn a lot more as we get closer to the 6th of April and how this affects the entire public sector workforce. The only advantage will be for recruitment agencies in that they will need to fill up roles left vacant by fleeing their positions due to IR35, but will the same level of quality still be available?

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